What is inside Tuleva III Pillar Pension Fund?

To date, we have been able to save money in Tuleva’s very own third pillar fund for three years! As in our second pillar funds, you don’t have to be a member of the association to join us in the Tuleva third pillar.

Start investing from the third pillar!

A simple rule to follow for both beginners and advanced investors: always start with the third pillar. There is no point in looking for other investment opportunities until you haven’t taken full advantage of the third pillar tax incentive. Why?

1. There are not many investments that guarantee an immediate 25% win

Anyone can transfer up to 15% of their gross income (but not more than 6,000 euros a year) to the third pillar free of income tax. If you have already paid your tax, you will receive a refund after filling in your income tax return. For example, if you invest 1,250 euros, the state will give you 250 euros back.

In other words, out of the 1,250 euros saved in the third pillar, your contribution is only 1,000 euros, and the government adds 250 euros. The investment will immediately receive a 25% leverage.

2. You can withdraw the money at any time

You can withdraw money from the third pillar whenever you want. You can also bequeath the units of a third pillar fund. Disbursements are taxed as follows (more here):

  • If you withdraw money before the pre-retirement age (currently 60 years), you will have to pay 20% income tax on your III pillar assets. However, this does not cancel the effect of the tax incentive. Effectively, you will have received an interest-free leverage loan from the government.
  • If you wait until your 60th birthday and have been saving for at least five years until the moment of withdrawing the money, only 10% income tax will apply.
  • Those who saved in any third pillar fund or insurance product before 2021 can withdraw money at the favourable 10% tax rate from the age of 55.

As usual with investments in stocks: don’t invest the money you need in the near future. The third pillar is suitable for saving with a longer time horizon.

3. No need to pay for a securities account

There is no need to spend time or money opening a new bank account or paying a fee for buying and holding fund units. Every Estonian already has a free account in the national pension register – the one where the second pillar assets accumulate.

Why do we need our own fund?

As said, the third pillar is the best tool for long-term saving, thanks to the tax incentive. Until now, this incentive tended to shrink in the hands of bank intermediaries. First, the fees for third pillar funds are even higher than for the second pillar. Second, the investment decisions of bank fund managers have so far not been successful for savers.

When we launched our joint third pillar fund, we did two things differently than most bank funds.

  1. The total cost of the Tuleva fund is around three times lower than the large third pillar funds of banks – up to 0.35% per year (Updated 13.12.2021). By the way, our fund may not be the lowest at any given time, because we do not subsidize the costs of any fund at the expense of other clients. But in Tuleva, you can be sure that your fund’s fees are among the lowest and that the fees will also decrease in the future. (1)
  2. Second, we do not speculate on market fluctuations but simply reserve a part of our wages every month and buy more shares of the world’s largest companies. Over time, our holdings in the companies that drive the world economy will grow, and the value of our assets will increase as the companies grow and pay dividends.

Like in the second pillar, these two things give us pretty good assurance that the growth of our assets will never lag far behind the growth of world stock markets. And as in the second pillar, the long-term performance of any bank fund has so far not even come close to the global stock market average.

As with our second pillar funds, one more thing is quite certain: the value of our assets will not rise steadily. When the world economy is in recession and stock prices fall, the market value of companies and, with it, the value of owners’ assets, including ours, will decline. This is not pleasant, but the history of the markets shows that, in the long run, we are earning more by staying on the course than by timing sales and purchases and trying to outwit the market.

Where do we invest our assets?

For the money invested in the Tuleva Third Pillar Pension Fund, we buy shares in around 3,000 of the world’s largest listed companies – all of which are included in the MSCI All Country World (MSCI ACWI) index.

As a reminder, an index is nothing but a list. The MSCI ACWI index is a list of the world’s largest listed companies by market value. The relative share of each company in the index is its market value divided by the total market value of all the companies in the index. (The stocks of more than 30,000 companies are traded on world stock exchanges. The MSCI ACWI draws a line at the 3,000 largest companies for practical reasons, as the relative share of each following company in the portfolio would be negligible.)

In September 2022, we introduced one addition: we will exclude nearly 200 companies from the list of the world’s largest 3,000 companies that do not meet the generally accepted criteria for sustainable and responsible investing (ESG). This does not change the main goal of our portfolio – to achieve the average return of the world market – but it gives an opportunity to take a small step in this direction to take into account and reduce the negative impact that our investments have on the world’s natural and social environment (2).

We do not buy stocks in these companies one by one, but we invest through four global index funds. It’s just cheaper. Due to the large volumes, the purchase of stocks involves near-zero costs for the world’s leading index funds. If we were to buy stocks in each company separately every month, it would be terribly expensive for us.

Learn more: what exactly is inside our portfolio?

 

We divide each euro saved in the Tuleva Third Pillar Pension Fund between BlackRock Funds as follows:

First, 86% of the money goes in index funds that invest in stocks in developed countries. These three funds are:

Why are we using these three funds that all invest in the same stocks? The Investment Funds Act allows a maximum of 30% of assets to be invested in one fund. The legislator wants to make sure that pension funds diversify their risks, although, frankly, this restriction is quite unnecessary in the event of a global index fund. In any of these three funds, the risks would already be very well diversified.

12% of the money goes to the iShares Emerging Market ESG Screened Equity Index Fund

The vast majority of companies in the MSCI ACWI index are in the developed world, and just over a tenth are in developing countries. Funds that cover the entire MSCI ACWI index have, for some reason, a higher management fee than the separate portfolios of developed and developing country funds. This is the simple reason why we use different funds to buy stocks in companies in developing countries.

So, a total of 98% of our money goes to the funds of developed and developing countries. We keep 2% of the fund’s money in a bank deposit until the fund reaches 30 million euros. Then we will consider reducing the share of cash. Why?

Savers in the third pillar can sell their fund units at any time. According to the law, such a sales transaction must be completed within three banking days. As long as the size of our fund is small, we keep a slightly larger cash reserve at the beginning and review it regularly.

The current fees of the fund are 0.35% per annum.

The current fees of the Tuleva Third Pillar Pension Fund, i.e. all expenses covered from the investor’s pocket, are 0.35% per annum. These expenses include our fund’s management fee (0.23% per annum), the custodian fee (0.05% per annum) and the fees of the funds in our portfolio (0.07% per annum).

In the Tuleva Third Pillar Pension Fund, no one has to pay a fee to start saving or to withdraw money.

Our fund’s expenses are still among the lowest and more around three times lower than those of banks’ large pension funds .

Any entry and exit fees of second pillar pension funds were abolished by the state a few years ago on the proposal of Tuleva. However, in the third pillar, some bank pension funds still charge 1% of the investor’s assets as an “exit fee” when withdrawing money.

What should you do if you have already saved money in a bank fund? Unfortunately, when switching funds, you still have to leave 1% of the assets to the bank for some funds. Nevertheless, it’s still advisable to exit these funds immediately: In less than a year, a typical bank fund would charge more than Tuleva, even taking into account the cost of switching funds.

 


(1) You can compare the current fees of all pension funds on the Pensonikeskus page. For insurance products, you need to look carefully for the “Key information document”.

(2) Read more from here

*Fees and portfolio information in the article updated as of 02.11.2022

 

Tuleva Management Report for First Half of 2022

Tuleva’s mission is to help people accumulate capital efficiently and confidently. The first six months of this year tested the nerves of many investors: falling stock markets, rising inflation and war in Europe shook the sense of security.

While other pension funds shrank, we at Tuleva stayed firmly on course and continued to save. The volume of Tuleva pension funds increased during the six months despite the fall in the securities markets. In July, the total volume of our pension funds exceeded 400 million euros for the first time.

The performance of pension funds

In the first half of the year, world stock markets fell by 14%. Our pension funds imitate the world market both in ups and downs, and that is why the prices of our pension fund units also fell: both Tuleva World Stocks Pension Fund and Tuleva Third Pillar Pension Fund fell by 13%. Due to rising interest rates, world bond markets also fell, and together with them, the price of a unit in the Tuleva World Bonds Pension Fund fell by 11%.

Stock markets largely recovered before this report was finalised. Since early July, the world market index has risen by 13%, and therefore the unit prices of our equity funds have returned close to the level at the beginning of the year.

The figure shows the change in the price of a unit of the Tuleva World Stocks Pension Fund as of 19 August 2022. Changes in the world market index and the Estonian pension fund average, as well as Estonian inflation are presented for comparison. From 1 January 2020, we use the performance of the MSCI ACWI index measured in euros as the world market index. For previous years, we used 73% of the MSCI ACWI index and 27% of the Bloomberg Barclays Global Aggregate index, as the law prohibited investing more than 75% of a pension fund’s assets in stocks. Source: Pensionikeskus, MSCI, Statistics Estonia.

In five years, the price of a unit of the Tuleva World Stocks Pension Fund has increased by an average of 10% per annum. Tuleva Third Pillar Pension Fund will only complete its third year in October: since its establishment in October 2019, the price of its unit has risen by an average of 11% per annum. The price of the Tuleva World Bonds Pension Fund has fallen by an average of 0.6% per annum over the past five years.

The figure shows the change in the price of a unit of the Tuleva Third Pillar Pension Fund as of 19 August 2022. Changes in the world market index and the Estonian pension fund average, as well as Estonian inflation are presented for comparison. We use the performance of the MSCI ACWI index measured in euros as the world market index. Source: Pensionikeskus, MSCI, Statistics Estonia.

This year, we also added inflation to the comparison, which has increased consumer prices by nearly 15% since the beginning of the year (from January to July), according to Statistics Estonia (annual inflation exceeded 20% at the end of July). In the past five years, inflation has reduced the value of money by an average of nearly 6% per annum. By the way, Tuleva investors can compare the performance of their pension account with both the world market average and inflation – log in and click on “World market return” in the “Your personal rate of return” drop-down menu and select “Inflation”.

The figure shows the change in the price of a unit of the Tuleva World Bonds Pension Fund as of 19 August 2022. Changes in the world market index and the Estonian conservative pension fund average, as well as Estonian inflation are presented for comparison. As the global market index, we use 50% of the Bloomberg Barclays Global Aggregate index and 50% of the Bloomberg Barclays Euro Aggregate index, measured in euros. Source: Pensionikeskus, MSCI, Statistics Estonia.
How should you invest in a volatile world?

In good times and bad, it’s important to remember that there is no such thing as a risk-free return. Return is the reward that investors receive for taking on risk. Even a seemingly safe bank deposit that pays one or two per cent interest per annum does not guarantee that inflation will not render the return on your assets negative. Rather, the value of money in a bank deposit will quite certainly fall in the long run.

That is why at Tuleva we have chosen essentially the only way to save money, which ensures that the value of our assets will grow in the long run, hand in hand with the growth of the world economy. How do we do it? We consistently take a piece of our salary every month and use it to buy more shares in the world’s big companies. We confidently stay the course through good times and bad.

This does not mean that the market value of our assets will always go up. When the world economy is in recession and stock prices fall, the market value of companies and, with it, the value of owners’ assets, including ours, decline. It’s not pleasant, but you have to remember that there is also a good side to falling share prices – we can buy shares cheaper using new contributions. As the economy grows and prices rise again, our assets will rise too.

In the history of securities markets, stocks have always brought good returns to those investors who haven’t panicked, stopped saving or sold their investments in bad times. It’s easy to follow this principle with a pension pillar, as regular contributions to the second pillar (and for many investors, also to the third) are made automatically. You only have to make sure that your pension pillars grow in a low-cost index fund.

Tuleva investors continue on course

Most of the investors at Tuleva do this. In the first half of the year, 3,380 new investors joined Tuleva, which is a few per cent more than during the same time last year. More than 61 thousand people are now saving money in Tuleva pension funds. More and more people are contributing to our third pillar fund. In the first half of the year, more than 18 thousand people made contributions, totalling 15 million euros. This is 30% more than at the same time last year.

Therefore, the volume of our pension funds grew despite the market decline. The assets of other index funds following Tuleva’s example are also growing. On the other hand, the assets of the banks’ old funds have shrunk by more than 10%.

Is an index fund suitable at any time?

In short, yes. The history of the world’s investment funds shows that most actively managed funds underperform low-cost index funds, both in upswings and downswings.

Nevertheless, the financial sector is taking advantage of the turbulent times and people’s desire to find some security. High-cost actively managed funds are promoted as if they were somehow more “war-proof” or better protected against an economic downturn than index funds.

No Estonian fund manager has been able to beat the market average for a long period of time in the history of Estonian pension funds, and is not likely to do so in the future. The past half-year has not changed this pattern.

Since the beginning of this year, unit prices of supposedly actively managed bank funds have fallen pretty much in sync with index funds. Betterfinance has noted that most of our banks’ pension funds are likely to be “closet index funds”. Although such funds charge higher fees, they still passively follow a stock index under the guise of active management. In other words, the investor does not get any additional protection against market fluctuations for a higher fee.

The figure shows the unit prices of the six largest second pillar pension funds since 1 January 2022. Source: Pensionikeskus.

LHV Pension Fund L stands out as an exception. However, it has another problem: most of the assets of this fund are not tradable on the stock exchange or are highly illiquid – their price in the fund’s report and in the calculation of the unit price might not reflect their actual current selling value (1). The LHV L unit seems to have lost less value in the market downturn, but we can’t be certain about that, as its assets may be overvalued (or undervalued).

When we talk about cars or wine, more expensive is often better, but in the world of investment funds it is very clear that higher fees mean lower returns. As data analysis consistently shows, funds that keep costs low and invest passively in the world’s largest companies are best positioned to achieve good long-term returns. That’s exactly what we do at Tuleva.

A step towards increased sustainability

In April, the Financial Supervision Authority approved the change to the terms and conditions of our pension funds, and we will start implementing the principles of sustainable investment from 1. of  September. We have carefully prepared for this change for a long time.

Rather than creating an additional small “green fund”, we will make our large funds more sustainable. In exactly the same way as we don’t have a single good pension fund hidden among old, high-cost funds. Low fees and an awareness of the impact of our investments on the world are core values, which it would be cynical to apply selectively.

What will change in our funds from 1 September and what will remain the same?

We will reduce the carbon intensity of our investments by 15–20% and exclude approximately 200 companies from the portfolio that, according to experts, clearly don’t follow the principles of responsible governance.

The implementation of the sustainability principles does not lead to higher fees or change the expected return and risk profile of our portfolio. Tuleva’s passive investment strategy will remain in place. We will continue to consistently increase our participation in the global economy, as this has been proven to create the best conditions for achieving good returns in the long term.

All Tuleva investors know the carbon intensity of their investments, the most common measure of climate footprint. No other pension fund manager in Estonia has yet published this for all their funds. We hope that Tuleva’s example will help others make their activities more transparent, as has happened with fees. Measurement is important so that people can make a choice based on objective data, not green slogans.

We make changes to the portfolio so that it does not increase the fund’s costs. Read more and watch the discussion between Tõnu and Tuleva member Sten-Andreas Ehrlich on what we are changing and why.

Better laws

This half-year, our investors received excellent news: the government plans to allow contributions to the second pillar to increase from 2025. The draft law has been sent to the government. There are many of us who have taken full advantage of the tax benefit of the second and third pillars. We are waiting for the opportunity to accumulate even more capital by setting money aside regularly, automatically and tax-efficiently. This is exactly what larger second pillar contributions mean.

Plans for the future

We have set the goal for the next five years to help 100,000 Estonians regularly set aside at least 15% of their income for a better future. If we succeed, the assets of our mutual funds will increase to 2.5 billion euros. The larger the number of people that invest with Tuleva, the better the saving conditions will be for all of us.

We know that having good funds is not enough for people to start saving. We still have a lot of work to do to get people who have already opened an account in Tuleva to start saving properly (like Laura does: make sure that your second pillar accumulates in a low-cost index fund, and regularly set aside at least 10% or more of your income in the third pillar). For those who have already made the most of the pension pillars or want to save for their children, an additional savings fund will have to be added to our product range.

Even more people have not even heard of Tuleva. We have to reach those people who happen to have no higher education in finance or whose spouse or friend has not thoroughly investigated saving in pension funds.

The government’s support is also needed to improve laws and the national components of the system to remove many of the important barriers to saving. As the only organisation representing pension investors in Estonia, Tuleva is a partner for the state in the development of a smarter pension strategy. We do not limit ourselves to criticism, but offer systemically effective solutions. We will continue to help remove legislative obstacles so that every euro set aside will bring more benefits to the people of Estonia in the future.

We continue to look for ways to further increase the value of Tuleva for our members. Tuleva members decided to make better pension funds for themselves. With this, they started a revolution that has already and will continue to benefit all Estonian people. At the same time, the members of Tuleva started a rapidly growing enterprise, the value of which is growing alongside the assets of our mutual funds. Why can’t we float a minority stake in our fund manager in a few years?

We are a small team and we have to prioritise very decisively when choosing what we do. During this half-year, we will focus on two things:

  • The government is working on an analysis of the sustainability of the pension system, the recommendations of which should be ready in the autumn. We keep our finger on the pulse so that the real concerns of pension investors are reflected in the analysis and the resulting recommendations, as well as the election programmes of political parties.
  • Our business plan and terms of membership capital need to be supplemented. We will map the alternatives and involve experts from among our members to reach a suitable structure that supports the achievement of our goals, taking into account the values and special characteristics of Tuleva.

We wish you peaceful saving!

Tõnu Pekk
Tuleva management board member


Tuleva financial reports for first half of a 2022 are here (in Estonian).

(1) LHV Pension Fund L 2021 Annual Report, pp. 22–23.

 

Tuleva funds will implement sustainability policy from the autumn

Tuleva pension funds will follow the principles of environmental sustainability and social responsibility, excluding investments in companies that do not meet the relevant criteria.

Rather than creating an additional small “green fund”, Tuleva will make its large funds more sustainable. In exactly the same way as we don’t have a single good pension fund hidden among old, high-cost funds. Low fees and an awareness of the impact of our investments on the world are core values, which it would be cynical to apply selectively.

The introduction of the principles of sustainability will not lead to an increase in fees. Tuleva’s passive investment strategy will also remain in place. We will continue to lower the fees and diversify the risks by constantly increasing our stake in the global economy. This has been shown to lay a good foundation for investors to get the most out of their savings in the long run.

Applying an ESG filter will further reduce the carbon footprint of Tuleva funds by around 15%.

Tuleva’s goal is to achieve a return as close as possible to the global market average. The application of the principles of sustainability will have a minimal impact on the performance of the funds. This impact may be either slightly positive or slightly negative.

The ESG (environmental, social, governance) filter excludes investment in companies that:

  • have 5% or more of their turnover coming from the extraction or use of energy coal or oil sands, the manufacture or sale of tobacco products or the production and sale of civilian firearms,
  • are related to the production and sale of controversial or nuclear weapons,
  • or violate the United Nations Global Compact governance principles.

In practice, this means removing almost 200 companies from Tuleva’s portfolio. We have found the necessary replacements in the model portfolio in cooperation with our partner, the world’s largest management company BlackRock.

The graph shows the weighted average CO2 intensity of the future pension funds. The year 2023 is the estimate that the indicator will reach after applying the ESG filter. Source: BlackRock

The CO2 intensity of Tuleva investors’ investments is currently 154 tonnes per 1 million US dollars of sales. Since the launch of our funds, it has fallen by around 30% due to the world’s capital moving towards less polluting industries. Thereby the market value of polluting companies falls and their share in indexes and index funds declines. For example, among our biggest investments are now technology companies instead of ExxonMobile.

Applying an ESG filter will further reduce the carbon footprint of Tuleva funds by around 15%.

Our climate footprint is likely to be already smaller than that of the large pension funds of banks. Unfortunately, we can only say this on the basis of estimates because no management company except Tuleva has so far published these figures. We hope this will change. Then people who care about the impact of their investments on the world can make decisions based on facts, not green advertisements.

Important information for Tuleva investors:

The management board of the Financial Supervision Authority approved the amendments necessary for the implementation of the principles of sustainability to the terms and conditions of the Tuleva World Stocks Pension Fund and Tuleva Third Pillar Pension Fund on 9 May 2022, Decisions No. 4.1-1/77 and 4.1-1/78. The amendments will take effect on 1 September 2022.

When fund rules are amended to a significant extent, unit-holders have a statutory right to leave the fund without paying an exit fee before the amendments enter into force.

Tuleva never charges extra fees for entering or leaving our funds. Therefore, you can leave the funds at any time without paying an exit charge. However, if you want to move your assets elsewhere just before the amendments to the terms and conditions take effect, file an application in the internet bank or Pensionikeskus by 31 July 2022 at the latest.

Documents (in Estonian):
Terms and Conditions of Tuleva World Stocks Pension Fund from 1 September 2022
Terms and Conditions of Tuleva Third Pillar Pension Fund from 1 September 2022
Prospectus of Tuleva World Stocks Pension Fund from 1 September 2022
Prospectus of Tuleva Third Pillar Pension Fund from 1 September 2022
Key Investor Information of Tuleva World Stocks Pension Fund from 1 September 2022
Key Investor Information of Tuleva Third Pillar Pension Fund from 1 September 2022
Assessment of the significance of the amendments

 

Tuleva management report 2021

The more people save capital for the future in our mutual funds, the better for all of us. The year 2021 confirmed this more than the previous years combined. While other management companies lost assets due to the pension reform, our funds increased by 150 million euros.

The regular contributions made by all of us (almost 60,000 people), more than 8,500 new investors and the rapid rise of the world’s securities markets all contributed to the growth of our assets.

The arrival of Tuleva five years ago brought the issue of high fees and poor returns to the focus of public debate in Estonia. By now, following Tuleva’s example, banks have added index funds with lower fees to their product range. I am glad that most people who have decided to switch their old high-cost pension fund for a low-cost index fund have chosen Tuleva. At the end of the year, our pension funds had twice as many assets as the index funds of all Estonian banks combined. (1)

We helped Estonia’s third pension pillar out of the doldrums. We launched our fund just two years ago. We, Tuleva investors, have invested almost as much money in the third pillar as the clients of all other management companies combined during these two years. Already at the end of 2021, our mutual fund was the largest in terms of the number of investors. In January, we outperformed the market leader, which has been operating for almost two decades, in terms of fund volumes.

All Tuleva investors will benefit from the volume growth

Global securities markets data consistently shows that low-cost funds outperform high-cost funds in the long run. Due to the increased volume of the funds, we reduced the fees even twice this year. We stay firmly among the price leaders, although being the cheapest fund at any given time is not our main goal. What is certain is that the larger the volume of our funds, the lower our fees will be in the future.

The graph shows the volume-weighted average current fees of second and third pillar pension funds by management company. Source: Pensionikeskus as of 6 December 2021.

Our low fees are not the result of a remote investor or a high-margin product covering the loss. Our low fees are based on low costs. We only spend money on things that improve the fund’s performance for the investor. Last year, the rapid growth of asset volumes made it possible to earn a consolidated operating profit of 152,000 euros in addition to lower fees.

The larger the funds grow, the higher the return for the Tuleva membership capital. Laura, a Tuleva member who contributed 1,000 euros to Tuleva five years ago and transferred both her second and third pillars to Tuleva at the earliest opportunity, has grown her membership capital by about 50% in five years. The membership capital has increased due to the growth of the global securities market (most of our membership capital is invested in our own pension fund), the membership bonus and, since last year, operating profit.

Our money is growing at world market pace

Ninety-eight per cent of our investors’ money is in two equity funds: Tuleva World Stocks Pension Fund and Tuleva III Pillar Pension Fund. The money in these funds is growing at the pace of the world market. The price of a Tuleva World Stocks Pension Fund unit has grown by an average of 10% per annum during just under five years since its launch. The world market index has grown by 11% per annum at the same time. We lag behind the index due to fees (even a small fee reduces returns!) and because there is still a small portion of bonds in our portfolio. The share of bonds has decreased to 6% of the fund’s volume. By next spring, the share of bonds will reach zero.

The unit price of Tuleva III Pillar Pension Fund has grown by an average of 16% per annum during a little more than two years. The world market index has increased by 18% per annum at the same time. The difference with the index is due to fees and the share of cash in the fund’s assets. We kept at least 5% of the fund’s assets in deposit during the start-up period to cover possible redemptions according to the fund rules. The fund’s growth allows the liquidity reserve to be gradually reduced to an insignificant size.

The graph shows the annual returns of Tuleva’s two largest pension funds compared to the returns of the world market and Estonian pension funds. Until the end of 2019, we used the MSCI ACWI stock index (73%) and Bloomberg Barclays Global Aggregate bond index (27%) as world market benchmarks, and from 2020 onwards, the MSCI ACWI stock index. We measure the return of Estonian pension funds by the change in the EPI index. Sources: Pensionikeskus, MSCI and Bloomberg.

The average return of Estonian pension funds has been 5% per annum for the past five years since the launch of our second pillar fund. In addition to high fees, the large share of bonds in Estonian pension funds reduces the returns for investors. Although the law has allowed 75% of pension fund assets to be invested in equities for more than a decade (and 100% for the past two years), management companies continue to hold more than half of the investors’ assets in zero-yield bonds (2).

Just under 2% of our investors invest in Tuleva World Bonds Pension Fund. Since the fund’s establishment in 2017, the unit price has grown by an average of 1% per annum (global bond markets have grown by 1.8% per annum and Estonian pension funds with a conservative strategy by 0.5% per annum). This return is lower than inflation and much lower than the global stock market return.

In addition, due to interest rate fluctuations, there have been periods when the fund’s performance has been negative. Last year, the value of the fund’s unit decreased by 2.2%. The performance of our fund differs from the benchmark index year by year not only because of costs but also because our portfolio contains slightly more euro-denominated bonds than the benchmark index. Due to the small size of the fund, we do not have enough low-cost funds available to emulate the global bond market.

The graph shows the annual return of Tuleva World Bonds Pension Fund compared to the global bond market index (we use Bloomberg Barclays Global Aggregate and Euro Aggregate as benchmarks with 50% relative shares each) and the average return of Estonian conservative pension funds measured by the EPI-00 index. Source: Pensionikeskus and Bloomberg.

We do not know how the world financial markets will perform in the future. The past years have been excellent for equity investors, but there will definitely be worse periods in the future. What is certain is that there is no risk-free return. Assets kept in bonds will certainly shrink due to fees and inflation. In the long run, the best way to save money is to continue to make regular contributions to a low-cost equity fund. Bonds are not suitable for long-term saving, but only for smoothing out fluctuations in the value of your pension assets in combination with shares or for short-term investing if the investor definitely plans to use their pension assets in the coming years.

Legal amendments are saving people tens of millions of euros

The legal amendments made in response to Tuleva’s proposals save Estonian people tens of millions of euros every year. The major amendments in previous years have been as follows: The state now automatically directs new second-pillar investors to a low-cost index fund, does not allow a part of second-pillar assets to be taken out as an exit fee upon switching funds, and prohibits hidden costs. The fees of pension funds have decreased 2–3 times in the past five years.

Tuleva has been fighting for several years for the state not to restrict people from using their second pillar assets in retirement. The restrictions were lifted in 2021, and nearly 30,000 people over the age of 60 could use their second pillar as they wished. In the past, they had to enter into a costly contract with an insurance company to use their assets, which we estimated reduced the return on their assets by more than one-third.

Unfortunately, the pension reform that entered into force in 2021 did not meet all expectations. We know that our funded pension system was already unnecessarily complex. Regrettably, the pension reform added even more complexity. As a result, many people who actually want to continue saving took their money out of the second pillar. We received a lot of questions from people who had withdrawn money from the second pillar and now wanted to invest it in our third pillar. There were other confusing issues.

Pension reform has taught us that we need to use more partners to work more effectively in legislation. In January, we became a member of Finance Estonia, an association of financial companies, and will participate in their funded pension working group.

We help you get through the information noise

Our blog, emails, and customer support help people navigate amid information noise and achieve their saving goals. Thanks to this, all Tuleva investors have been able to make their choices independently. No one has pulled their sleeve at a bank branch or in a shopping mall. It’s also important for keeping costs low: we don’t spend investors’ money on commissions to sales agents who solicit impulsive decisions.

People who have made an independent choice stay on course and do not jump from one fund to another: the number of people leaving our funds is several times lower than in other pension funds. On average, less than 3% of our investors leave for other funds every year. This figure is 3–4 times higher in other pension funds (3).

In the autumn, we received great recognition when the global customer support platform HelpScout recognised our customer support: we are among the 25 companies with the highest customer satisfaction score on the HelpScout platform! Pirje Keeroja performs most of our customer support work, but all other team members can also answer the investors’ questions on a regular basis.

Tuleva’s first five years have been beneficial for members, investors and Estonia as a whole. What can we do in the next five years?

Tuleva 2026: our mutual funds will amount to 2.5 billion euros, and we will have 100,000 dedicated investors

We know that most Estonians want to financially secure their future, and they know that they have to do something for it. We also know that our second and third pillar funds are the best tool for most Estonians to secure their financial future. However, most people, including those who have already started saving in Tuleva, are not saving enough.

Having good funds is not enough for people to start saving. We have a lot of work to do to get people who have already opened an account in Tuleva to start saving properly: make sure that their second pillar accumulates in a low-cost index fund, and set aside at least 10% or more of their income in the third pillar.

Even more, people have not even heard of Tuleva. How can we reach people who happen to have no higher education in finance or whose spouse or friend has not thoroughly investigated saving in pension funds?

We need to transform our current “club of the wise” into an investment company accessible to all. Over the next five years, we will help 100,000 people in Estonia save more than 15% of their income. If we succeed, the assets of our mutual funds will increase to 2.5 billion euros.

What needs to be done to achieve this?

  • This year, we will focus on existing investors: we will consistently identify and remove obstacles that prevent people from taking full advantage of Tuleva. Above all, the emphasis is on getting to know and measuring the investors and, based on that, improving content and the customer journey.
  • Next year, we will make an additional fund for those who have already made the most of the pension pillars or want to save for their children. The success of the third pillar fund cautiously gives hope that, if the needs of investors are truly met, it will be possible to do something with this product that is significantly better than the products on the market today. We will use the year to map these needs for a new product.
  • Now that the major obstacles to using pension pillar money have been removed from the law, we are focusing on removing barriers to starting saving. We will use the ongoing process of analysing the sustainability of the state pension system this year and will carry out clarification work to make third pillar contributions easier.

What will not change is that we will still focus only on people who make informed choices. We do not attract anyone to our funds with tricks, but we help people see through the information noise. The success of the third pillar gives hope that this is possible. We do not have inferior, expensive funds that we try to sell to careless customers.

And more. We will be applying a sustainability filter to our investments from this year. We care about the impact of our actions on the world, and today we have the opportunity to take one small step to make our investments less damaging to the world. We will also help the Estonian people better understand the real impact of investments on the environment. We know that the mere word “green” in the name of a fund means nothing. With all this in mind, we are keeping our investment strategy unchanged: we continue to be a low-cost index fund that aims to achieve average global market returns over the long term.

This change is currently awaiting approval from the Financial Supervision Authority. We will write more about it soon.

We established Tuleva to invest our retirement assets better. Tens of thousands of people have joined us over the past five years, believing that together we can achieve a better future. In the next five years, we will make Tuleva work in a way that will significantly increase the volume of capital saved by the Estonian people.

Happy saving!

Tõnu Pekk
Tuleva founder and fund manager


Based on Pensionikeskus statistics on second and third pillar funds, Tuleva calculations as of 6 December 2021.
Source: Statistical review by the Ministry of Finance.
You can find statistics on switching second pillar funds on the Pensionikeskus page.

Retirement age is approaching: How should you use the assets accumulated in your pension pillars?

After Parliament lifted restrictions on the use of the second pillar, the assets you accumulated in the second and third pillars are really yours. You can use them as you wish; you can take them out all at once or pay yourself a pension supplement every month. You can also keep your assets growing in the fund. What should you know to make the best decision?

This blog post and guide are based on our live show with Kristi Saare, chairman of the Tuleva supervisory board, on 7 April 2021. Tuleva members Taavi Pertman and Kristjan Lepik helped us think about the choices for the show, and our office manager, Pirje Keeroja, gathered feedback and members’ questions. You can watch the show here (in estonian):

What options do you have?

If you are 60 years or older (60 is currently early retirement age), you can do the following with the pension pillars:

1. Continue to save: money will continue to grow in the pension fund.

No age obligates you to take out your pension pillars. Nor does receiving a state pension mean you have to use your second or third pillar. If you work, regardless of age, a part of your salary and social tax will continue to go to the second pillar, and you can still contribute up to 15% of your income to the third pillar and receive an income tax refund on it.

Pension fund units can be inherited. When you are no longer with us, your heirs will receive your pension fund units in their pension accounts, or they can withdraw them in cash (20% income tax will apply in the latter case). You don’t have to file applications for bequeathing your fund units.

2. One-time payout: you take out all the accumulated money at once.

When you reach early retirement age, you can take out all or part of the money accumulated in your second or third pillars at any time (1). To do this, you need to submit a one-time disbursement application through Pensionikeskus or your internet bank, and the money will be credited to your bank account as follows:

  • from the second pillar by the 20th day of the following month;
  • from the third pillar within four working days of the application.

Upon payment, Pensionikeskus withholds 10% income tax. The amount paid does not count towards your taxable income or affect the amount of your tax-free income.

IMPORTANT! Any withdrawal application will permanently terminate your second pillar contributions (both the 2% from your salary and the 4% that the state contributes from the social tax paid on your salary). You can continue making contributions to the third pillar even if you are already withdrawing money from the third pillar at the same time – you will still receive an income tax refund.

3. Funded pension: you can take out the accumulated money as a monthly pension supplement.

You can draw a monthly pension supplement from the second and third pillars by submitting a funded pension application at Pensionikeskus. Unlike your state pension, the funded pension will not be paid until the end of your life but, rather, until the agreed term. Should you die earlier, your heirs will receive the remaining amount. If you live longer, you will have to live on a state pension or other assets after the end of the funded pension.

The amount of the funded pension changes over time, according to changes in the unit price of your chosen pension fund. This means that your remaining assets in the second and third pillars will continue to earn income in the fund (or losses in the event of a market downturn). Funded pension payments are exempt from income tax if your funded pension agreement is long enough – for example, at least 18 years if you sign the agreement at age 65 (2).

This is how simple your options are (3).

How should you decide?

In the past, the government’s idea was to very precisely prescribe how people should use the assets accumulated in the pension pillar. We believe that when a person has reached 60, they probably know better for what purpose they use their accumulated assets.

Here are a few questions that may help you decide.

*You can find the expected amount of your first pillar pension in the calculator on eesti.ee. NOTE! See only the amount of the first pillar pension.

Should you switch pension funds as you approach retirement age?

Management companies usually advise investors to move their assets to a conservative bond fund as retirement age approaches. Other pension funds invest a large part of their assets in stocks and generally offer much higher returns, but their unit price also fluctuates more. When markets fall, you will not have time to wait for market recovery before you retire.

When choosing a fund, always keep in mind that low-cost funds usually achieve better returns than high-cost funds.

Nobody likes it when the value of the assets they have accumulated over the years suddenly falls by 10, 20 or even 30%. Unfortunately, the risk-free rate of return today is 0%, and what’s worse, inflation reduces the purchasing power of a zero-return investment every year.

The graph shows what happens with the purchasing power of 10,000 euros in a pension pillar over the years when inflation is 2% per annum. The stock market return and risk-free return are assumed to be 5% and 0% per annum, respectively. Remember that the stock market return is not guaranteed and can be negative for several years in a row.

In conclusion, neither science nor the best experts can give a clear answer as to the right investment strategy or the most suitable pension fund for investors nearing retirement age. Then how can you decide?

  1. If you have reached your target amount and plan to withdraw money from the pension fund in a year or two to make your dream come true, then it’s perhaps better not to take any more risks. Fluctuations in the stock markets can thwart your plans. Move the accumulated second and third pillar assets to a bond fund, and you can be sure that when you withdraw the money after a few years, you will not be in for an awful surprise.
  2. If you don’t plan to withdraw all the money in the near future or instead want to leave it to your children, consider keeping the assets in stocks. This way, your children’s inheritance is more likely to grow larger over the decades.
  3. Most future retirees don’t yet know exactly when they will stop working or how much money they will need every month. Your working career can end for reasons beyond your control, for example, if your health fails or your employer decides to give up your services. Experts advise those approaching retirement age to keep at least one year’s expenses worth of assets in a rainy day fund – one where money can be withdrawn at any time and where its value does not fluctuate, i.e. a bank deposit or a conservative pension fund.

When choosing a fund, always keep in mind that low-cost funds usually achieve better returns than high-cost funds. Fees play an especially important role in the case of funds with a conservative strategy; in funds with higher fees, the value of your assets is quite certain to decrease in the coming years. Therefore, leave any fund that has fees higher than 0.5% per annum! You can find a comparison of fees here.

 

(1) As the pension reform was quite rushed, a few ways to use the money are still technically unavailable this year. In 2021, money can be withdrawn from the second pillar only in full and not in part. Also, it is impossible for technical reasons to withdraw third pillar money in 2021 through a funded pension. It will be possible in 2022.

(2) A sufficiently long term is one that is longer than your average life expectancy. According to Statistics Estonia, this means that if you are 65, your remaining life expectancy is still 18 years. In other words, if you at age 65 sign a funded pension agreement for at least 18 years, your income tax will be 0%, whereas, for a shorter agreement, it will be 10%.

(3) The law also allows you to take out a lifelong or fixed-term insurance contract for receiving your second or third pillar pension. Unfortunately, the fees of insurance contracts are currently so unreasonably high that insurance contracts are not even worth mentioning as an option. There is no reason to keep your pension assets at an annual cost rate of more than 1%.

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